Personal Loans - the Devil in Disguise?

Want easy money?

Don’t want to fill out paperwork?

Who does?

Money may be easy to get, but it comes with a price. Literally.

I logged into an investment account last week, and an offer appeared: I could get $14,500 instantly.

This type of loan was secured against collateral (my portfolio of securities). So, they already have some info on me, not to mention my securities.

But the fact remains: I could instantly get access to those funds and move them anywhere (except my portfolio). For a price, of course.

Personal loans are on the rise: but are they a good idea?

Personal loans are everywhere. The amount of new loans is up by 16% in 2022 alone. Why the increase? A few reasons below:

• The amount of new online lenders - they want customers! They are making it easier for borrowers to obtain a loan without having to go through your main street bank.

• The rising cost of living in this world leads more people to borrow money to cover expenses or consolidate debt.

• The increasing popularity of personal loans for elective expenses, such as home renovations or plastic surgery.

While personal loans can be helpful for borrowers in need, it is important to be aware of the risks involved before signing for one. Personal loans have higher interest rates than other types of loans, and they can be difficult to qualify for if you have bad credit.

So, what’s the catch with my loan?

As with any loan, the lender wants to be compensated for their ability to take you on as a risk. The interest rate is 8.9%. While that’s not astronomical, it still means I’m on the hook for $215 in interest payments if I repay it in 3 months.

Rates are sky-high now - the highest they’ve been in years. The rate of 8.9% is actually pretty decent given that the average APR (annual percentage rate) for personal loans with good credit is 14%+. It could be as high as 35.99%!

These rates are high. But keep in mind you are asking a lender to give you money for something - a medical expense, a home improvement, a big upcoming purchase. Since it could be anything, they want to know things about you. Such as:

• Credit score: This is one of the most important factors that lenders consider when evaluating a loan application. A good credit score shows that you are a responsible borrower and that you are likely to repay your loan on time.

• Income and debt-to-income ratio: Lenders will look at this to make sure that you can afford to repay your loan. Your debt-to-income ratio is the percentage of your monthly income that goes towards debt payments.

• Employment history: Lenders want to see that you have a stable job and that you are employed full-time.

But Do You NEED It?

Make sure that you have exhausted all other options before taking out a personal loan.

Can you afford to repay it? Examine your monthly income and debt obligations to make sure that you can afford to make the loan payments - and any fees.

What’s the rate and term (length)? Make sure that you understand these before you sign.

Any prepayment penalties? Some personal loans have prepayment penalties, which means that you will be charged a fee if you pay off the loan early. After all, a lender is looking forward to all those interest payments you promised them.

If You Need It and Proceed

Like anything else, shop around and compare rates from different lenders. Some websites will even aggregate lenders for you in one spot.

Get pre-approved for a loan before you start shopping. This will give you an idea of how much you can borrow and what interest rate you will qualify for. Some popular lenders are Sofi and Lending Tree.

It should apply without saying, always READ THE FINE PRINT. Make sure you understand the loan terms so there’s no confusion.

This Isn’t the Only Way to Get That Money:

• If you have good credit, you may be able to qualify for a 0% APR credit card. This can be a good option if you need to borrow money for a short period of time.

• If you have bad credit, you may be able to qualify for a secured loan which is backed by collateral, such as a car or a house. But if you default, say goodbye to your car or house. :(

• While it can be uncomfortable, you may be able to get a no-interest loan from family or friends.

Personal loans can be helpful, but also scary. Understand the risks, and shop around / compare. Know that while getting easy money is out there, you are on the hook for interest and maybe extra fees.

So, before you sell your soul (kidding!) know that shopping around, good credit behavior, and a stable paycheck can assist in getting the most money and lowest rate.

After all, you don’t want to owe more than you have to.

Save On,

Chris